So far Ireland has spent €67.8bn bailing out the banks, comprising €62.8bn in cash and promissory notes directly injected into the banks, and a further €5bn gifted to the banks by NAMA in state-aid and for which we are now on the hook if property prices don’t recover. In a country whose GDP was €156bn in 2011, this represents 43% of GDP. I wonder how the Spanish would feel if they were told now that this was the type of debt they will need shoulder to rescue their banks, rather than the tiddly 10% of GDP implied by the €100bn bailout announced over the weekend? But as bad as Ireland’s bailout costs are so far, they could be set to grow even more. We know about the extra €4bn which the deputy governor the Central Bank of Ireland announced a fortnight ago, which will be required in a couple of years to bolster capital levels. But what about future losses at the banks?
The 2011 annual reports for Bank of Ireland, AIB/EBS and Irish Life reveal the scale of losses that will be in store if our economy doesn’t turn around and grow. Each of these three financial institutions published two valuations for their loan-books – a “carrying value” which is what is reported in the accounts and represents the book value of the loans less a convoluted provision for impairments and a “fair value” which represents what the loans are worth today if they were called in and the underlying asset was used to pay off the loan. Here is the summary of the loan books in 2011 which show that the overall difference between “carrying value” and “fair value” for these three institutions is an almighty €38bn which if it materialised would wipe out the entire capital base and need nearly €20bn in additional capital to boot, just to keep banks solvent. To give them adequate capital buffers might involve a further €20bn. So €40bn, all told on top of the €72bn current and projected cost.
And take a look at the loan books the previous year in 2010.
There has been a major deterioration in the “fair value” and the gap between the “carrying value” and the “fair value” which is what you would expect when the economy is still in recession, where residential property fell by 16%-plus in the past year and commercial property fell by 10%-plus, and where unemployment is now at a current-crisis record of 14.8%. But will fortunes swing around and will we grow to such an extent that the “carrying values” can be realised for these banks’ loans.
Who knows, but we do project anaemic growth in 2012 and 2013. We do expect unemployment to remain above 11% during the next three years. We will be introducing new personal insolvency legislation which should provide a practical means for those in impossible financial situations to find some closure. What about property prices? It seems on here the consensus is that prices will drop another 20% on residential to bring the total decline from 50% to 60% – 20% of 50% is 10% and 50% plus 10% is 60%. Commercial property is still declining despite the bumper giveaway budget in December 2011, and in general there is still vast oversupply. Personal loans are likely to come under pressure with planned budget adjustments of €8.6bn between 2013-2015 which will average €5,000 per household in 2015 alone, after €4,000 in 2014 and €2,000 in 2013.
Is there a cap on what this State will spend on bailing out its banks? Is it 50% of GDP as we are presently approaching or 100% of GDP, or in absolute terms is it €72bn or €100bn or what? The Spanish have just loaded 10% of GDP onto their national debt to deal with the banks. Would they accept anything like the burden this country has shouldered and which may significantly increase?
Weren’t the 2011 stress tests supposed to put an end to this drip-drip of bad news on the banks, which has entailed a journey from “cheapest bailout in the world” to what is beginning to look like “most expensive bank bailout in the world”? Yes, the stress tests were supposed to draw a line under the banks and their prospective losses, but the trouble is the economy is continuing to list, and our export markets are all looking shaky. We haven’t yet reached the depths in property prices projected in the stress tests, but we are on the eve of getting personal insolvency legislation which may crystallise losses for the banks as people use new arrangements. Last year’s stress tests may need to be revisited in a few months.
Lastly, neither IBRC nor NAMA provides “fair values” in their accounts for its loans at present. So we could expect the above figures, which are in themselves nightmarish, to grow further if these two other 100% state-owned institutions were to be included.